Corporate travel buyers soon may have opportunities to work with stronger airline competitors, particularly in Chicago, as the nation's healthier discount carriers jockey for position in the wake of ATA Airlines' bankruptcy filing last month.
AirTran Airways, America West Airlines and Southwest Airlines each has ambitions to grow its position at Chicago Midway Airport as ATA retreats from the market. All three are prepared to expand elsewhere if opportunities arise. AirTran's current proposal for a portion of ATA's assets would hasten its emergence as a formidable player east of the Mississippi River and place it in direct competition with Southwest for a slice of the large Chicago business travel market.
With several large and small airlines on the brink of financial collapse, clashes between viable low-cost carriers are inevitable. Such network overlap may keep fares down in affected markets, even as industry prices slowly recover.
Meanwhile, beleaguered legacy carriers can ill afford traffic erosion in business centers that once had been their exclusive domain. "There is no place to hide," said a sales executive at a major network carrier. "The low-cost carriers are dancing with you someplace."
"Going east-west really changes the way a business flyer perceives AirTran in many of our markets," said AirTran president and COO Robert Fornaro.
The proposed acquisition would give AirTran 14 gates at Chicago Midway and an opportunity to cultivate a sizable operation in the nation's second-largest travel market. Its existing Midway presence includes flights only to its Atlanta hub. "The acquisition of these gates in a facilities-constrained marketplace is a significant benefit," said AirTran CFO Stan Gadek, referring to capacity restrictions at O'Hare International Airport.
AirTran's Chicago operations would launch with as many as 20 planes leased from ATA until AirTran phases in more of its own aircraft. Because AirTran's planes have fewer seats than those operated by ATA, "we will be removing downward pricing pressure in the marketplace," Fornaro said.
The proposed deal also contemplates codesharing between ATA and AirTran and would enable AirTran to develop ramp space into a facility for up to 10 regional jet gates. It needs approval from the bankruptcy court overseeing ATA's restructuring, the Air Transportation Stabilization Board and the City of Chicago. If the plan unfolds as AirTran executives envision, operations from Atlanta—its primary hub—by the end of 2005 would represent only 55 percent of the carrier's total capacity. AirTran also preliminarily snatched 19 ATA departure and arrival slots at New York's LaGuardia Airport and eight at Reagan Washington National Airport, though other carriers reportedly are talking to airport authorities about those slots.
"AirTran has been a bit more compatible with corporate programs than ATA has been, so there is the potential for this to have an impact," said Barry Rogers, Chicago-based senior consultant with TCG Consulting, citing AirTran's premium class and its corporate sales efforts. "On the other hand, Midway Airport almost is entirely low-cost carriers, so corporations aggressively looking to reduce costs already have had low-cost options in the market."
American Airlines' fares from Midway to Dallas can be as low as one-third the carrier's fares between O'Hare and Dallas, according to Teresa Powell, senior manager of corporate travel services at Health Care Service Corp. in Chicago and president of the Midwest Business Travel Association. "We welcome the continuation of low-cost competition, from whomever," she said, "and this could be a strength for AirTran because it already has established relationships with many companies."
Financial analysts, however, were decidedly skeptical about AirTran's proposed plunge into Chicago, in part due to the carrier's previously planned capacity growth and costs associated with the ATA transition. Furthermore, it stirred Southwest into action. The carrier already announced an expanded flight schedule from Midway and CEO Gary Kelly recently characterized the market as "the number-one priority."
Meanwhile, America West and Southwest are exploring possible deals for ATA assets. Southwest's route network from Chicago includes substantial overlap with ATA's existing service, including nonstop flights to Fort Lauderdale, Indianapolis, Las Vegas, Los Angeles, Orlando, Philadelphia, Phoenix, Seattle and Tampa. The carriers also operate to different airports in the Boston/Providence, Baltimore/Washington and Oakland/San Francisco areas.
Noting the high level of overlap, Lehman Brothers analyst Gary Chase told AirTran executives on a conference call that "there is a reason why ATA is in this position."
In all, Southwest's Midway schedule by March will consist of 161 daily nonstop flights to 30 destinations from 19 gates, its fourth-largest operation. "I see the potential under certain circumstances that we would want even more than the 19 gates," Southwest's Kelly told BTN
(see story). "If ATA downsizes, that very well could translate to Southwest growth opportunities."
Changes in Chicago would represent a new level of competition between Southwest and AirTran, two well-positioned low-cost carriers increasingly relevant to corporate travel buyers. Southwest has name recognition, a successful booking portal for corporate clients, the perception and stated promise of the lowest fares in the market and an expanding fleet with no less than 29 new planes due to arrive next year.
AirTran also brings a growing fleet of new planes, as well as an inflight product featuring a business class, assigned seating—an element Southwest is studying—and XM satellite radio. AirTran also is poised to unveil its corporate booking portal and recently received positive marks from corporate travel buyers
(see story)."If you can't compete with Southwest then you really need to get out of the game," said AirTran CEO Joe Leonard.
Many around the industry expect the two carriers to aggressively compete for business in Chicago if AirTran can establish a presence. "I am glad AirTran is going against Southwest," said one major airline executive. "Let them beat each other up for a while."
America West also stands ready to either pick up ATA assets if a non-cash deal can be worked out. "Eventually, there will be more rationalization of capacity and consolidation among low-cost carriers," said America West CEO Doug Parker during a conference call with analysts and reporters. "We anticipate playing a role in that."
For its part, ATA said it would continue uninterrupted operations during the Chapter 11 restructuring process, undertake "a gradual, measured exit from Chicago" and reorganize "as a formidable low-fare carrier." The latest victim of the ongoing industry crisis, the airline plans to focus on its Indianapolis base but will face the growing presence of Northwest Airlines. Northwest last week announced a third wave of flights that by February would bring total jet departures from Indianapolis to 44. With 16 nonstop destinations from the market, Northwest would be Indianapolis' largest operator.
To maintain operations, ATA received permission from ATSB to use cash collateral from a government-backed loan while the company searches for debtor-in-possession financing. ARC said it would continue processing without interruption ATA validated transactions.